Q4 2023 Market Update

The start of a new year is always a point of reflection and an opportunity to look forward with renewed enthusiasm. That is certainly the case for investors.

In this edition, read expert insight about:

• What happened in 2023
• Inflation does not fall in a straight line
• What this all means for you

What happened in 2023

Whilst 2023 was a bit up and down for investors, with investment values not making much headway for most of the year, a strong rally in November and December ensured the year finished full of optimism for 2024.

The last couple of months of the chart below clearly shows the rise seen in the mixed investment sectors between October 2023 and the end of the year.

This relative positivity is, in large part, thanks to inflation falling further towards the 2% target. Although the Bank of England (BoE) is reiterating its ‘staying higher for longer’ narrative, many economists now expect that interest rates are going to drop quicker than the BoE seems willing to admit.

Source: FE fundinfo

Inflation does not fall in a straight line

High inflation has dominated headlines to such an extent over the last two years that you would be forgiven for feeling bored by the repetition.

The good news is that, while UK inflation remains above the BoE’s 2% target, inflation has dropped to 4% in the 12 months to December 2023. That is a marginal increase from the 3.9% figure recorded in November 2023, but still a substantial improvement on the 11.1% peak we saw in October 2022.

Following two months of sharp declines, this rise was unexpected, with similar upticks in inflation being seen in the US and eurozone.

Chancellor Jeremy Hunt was quick to point out that “inflation does not fall in a straight line,” adding: “We need to stay the course we have set out, including boosting growth with more competitive tax levels.”

The BoE’s Monetary Policy Committee (MPC) has said it expects inflation to continue falling towards the 2% target during 2024. However, it has also warned that it may take until the end of 2025 to reach the target.

Keep an eye out for potential tax cuts in the Spring Budget, as alluded to by the chancellor. With inflation falling and an election on the horizon, the chancellor may feel he has the scope for tax cuts which may help keep inflation higher.

Despite inflation starting to come down, prices remain more than 15% above where they were a couple of years ago.

What this all means for you

Whilst it is impossible to predict the future, over the long term, a return to an inflation rate that remains around the BoE’s target of 2% will hopefully be positive for investors.

Rising prices can affect the stock market; it can make investors nervous, and corporate profit margins can fall. This can lead to share prices dipping as we saw in 2022. Fortunately, decreasing inflation could have the opposite effect, and may contribute to market stabilisation in 2024.

In the meantime, with prices remaining high, it might be a good idea to review your expenditure. You need to ensure that you save and invest in such a way that your money keeps pace with the rising cost of living over time.

This is particularly important when planning for retirement. It is for this reason we ensure allowing for future inflation is a key part of our planning for clients.

If you want to reach your financial goals and protect your wealth from the effects of inflation, you may find it constructive to seek financial advice.

We are here to help

As financial planners, we have helped clients weather many economic storms over the years, and that is something my team and I are proud to continue doing.

Markets may rise and fall, but your investment goals should remain the same, and it is our job to help you achieve them. For almost 20 years, clients like you have trusted us to provide honest, independent advice in a friendly and professional way.

If you have any questions about anything you have read in this update, please do not hesitate to contact your financial adviser, who will be happy to give you all the support you need.